Mortgage brokers wary of 2010

Banks have tightened their lending conditions, but mortgages continue to be relatively accessible to both Czechs and expats living in the country. Foreign investors, on the other hand, are finding it harder to be approved for mortgages as banks try to keep the default rate as low as possible during the economic crisis. Younique, an independent mortgage broker, specializes in helping foreign clients buy real estate or insurance coverage in the Czech Republic. Board member Pavel Jileček sat down with The Prague Post to explain why would-be homeowners are having a harder time approaching banks on their own.

The Prague Post: Younique markets itself to expats and foreigners. What percentage of your mortgage clients does this demographic make up?

Pavel Jileček: Younique was originally set up to mainly help foreigners. For example, in the past year, 80 percent of our mortgage volume was created by foreigners - either expats or foreign investors. Of course, there were a lot of changes this year. So, currently, we're also focusing more on Czech clients, and, at the moment, we're about fifty-fifty. Demand from foreigners, of course, dropped off, and the situation got worse on the property and real estate markets.

TPP: Of your foreign clients, are most of them foreign investors based abroad, or are they expats who live and work in Prague?

PJ: I think, again, it's fifty-fifty. In our mortgage department, about 50 percent of clients are based abroad, mainly in the United Kingdom or Ireland, and they're just buying property for investment and to rent. They can basically do everything remotely. We usually see these clients once or never at all. We are also working with expats, customers who are working here in the Czech Republic, employed by Czech companies, etc. There is a big difference between these two groups, because it's become much more complicated for internationally based clients at the moment. Expats are more like Czechs to the banks. They still have quite good access to mortgages, but, for international clients, it's another story.

TPP: Why is it more difficult for foreign investors, and how are the lending conditions more strict for this group of clients?

PJ: Foreign investors must always provide a 15 percent down payment. For Czechs and expats, it depends on their situation, but, generally, 100 percent mortgages are still available. The maturity terms for the loan are also much shorter for international clients. An international client can take out a 20-year loan at the most, while expats can take out loans for 30 or even 40 years. The length figures into monthly payments because, of course, the payment is much higher on a 20-year loan compared with longer ones. The reason for all this is that banks don't have as good access to international clients in the case of a default. Usually, it's impossible for the bank to collect on debts from international clients, but, of course, if you live here or work for a Czech company, from a legal point of view, it's much easier for the bank to communicate and negotiate with the clients. It's much easier for a bank to seize the local salary or implement restrictions on local clients. For international clients, the only thing they can claim really is the property.

TPP: Would the property itself be sufficient collateral for foreign clients?

PJ: The problem is banks are not actually interested in collaterals. They're very unhappy when loans and mortgages fail and they have to seize the property. It's not easy for them to make real estate deals; they're in the finance business. So the collateral is the last thing the bank is interested in. Seizing property is very complicated and always a big deal. Additionally, Czech banks have to report defaults to the national bank [ČNB], and, when the default rate exceeds a nationally set limit, the central bank can impose stiff penalties on the banks.

TPP: Have any banks exceeded or come close to breaching that default rate limit?

PJ: Actually, here in the Czech Republic, the default rate is very low; it's in the range of about 2 percent of the total mortgage volume. Currently, the banks are OK, and there is not pressure on them from any huge default rate. However, all the reports we have are from 2008. We expect reports of defaults to be significantly higher in 2009. We believe the biggest number of defaults ever was recorded this year. Those numbers won't be available until the end of this year, but we expect the banks to show quite an increase in that rate. This will probably lead to tighter lending conditions from banks and maybe even action by [ČNB].

TPP: Lending conditions have already become more restrictive. Do you anticipate upcoming data from 2009 to exacerbate that situation?

PJ: Yes, there's a possibility of that. There's still a great demand. We felt people wanted to borrow even in the first half of the year, but it was very complicated to process any sort of deal in the bank. Right now, it seems banks have realized they've lost a lot of mortgage volume this year because of their tightened policies. So, now, it appears they're releasing the conditions a bit to get the volume back up before the period closes at the end of the year. But there is the possibility that next year, after the annual report is completed, they'll restrict the situation once more.

TPP: You mentioned 100 percent mortgages. It was reported that, in the first half of the year, those were no longer available. Has that been reversed?

PJ: From the beginning of 2009 until about four months ago, it was impossible to get a 100 percent mortgage, even for a Czech client with a perfect record and credit history. Additionally, banks didn't even trust independent valuation reports. These are independent appraisals of real estate properties. At the end of the day, when the valuations were submitted, the banks were saying, "No, we don't believe the property is marketable at this amount." That was also a big problem for clients because, typically, if you had the official valuation, you could rest easy as it was guaranteed that was what the bank would accept. You could go ahead and calculate exactly what the mortgage amount would be. But, recently, with the financial crisis, nothing was certain until you had the final approval from the bank.

TPP: Is it more difficult for expats to get a mortgage than Czech citizens?

PJ: It is harder, but it also depends on the bank you choose. There is a big difference among the banks and what sort of mortgages they are more likely to approve, so you really have to assess each case individually and look at what kind of property they're going to buy, what their financial situation is, whether they're self-employed, etc. Once you've done that, you decide which bank is the most suitable for you to approach. At the moment, it's really impossible to make that determination on your own because the banks are changing so much from one minute to the next. You really need to get advice before applying for a mortgage because, otherwise, you'll be lost. By choosing the wrong bank, you can really experience hell.

Claire Compton can be reached at
ccompton@praguepost.com